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China Times: Currency depreciation is not an economic panacea

2017/05/13 18:12:19

CBC Governor Perng Fai-nan

The Taiwan dollar has appreciated more than 7 percent in less than half a year, three times that of 2016 and a rate of increase not seen for over a decade.

There are two main factors behind this development. First and foremost is the inflow of hot money. In the first four months of this year, the net inflow of hot money reached US$10.6 billion, US$6.74 billion of which went into Taiwan stock market, more than for other Asian stock market.

The second factor is the ending of central bank intervention in the currency market. In the past, the central bank would usually take action just before the forex market closed, but no such moves have been detected recently.

Market sources have attributed this to deliberate efforts on the part of the bank to avoid being included in Washington's list of currency manipulating countries.

With the central bank declining to intervene, the Taiwan dollar has quickly returned to its market level.

The strong and rapid rebound of the Taiwan dollar makes it difficult to accuse Taiwan of manipulating its currency in the short term and helped shares in Taiwan pass the 10,000-point mark.

On the other hand, the appreciation of the Taiwan dollar has caused exporting manufacturers a lot of pain.

Historically, Taiwan has relied on exports for economic growth and a strong currency weakens the competitiveness of exports and minimizes the contribution they make to the nation's economy.

Some have advised the government to show more flexibility in currency policy to give exporters more time to adjust.

However, in the long run such an approach is inappropriate. The currency exchange rate is a double-edged sword, in as much as protecting one sector hurts the other.

In the past, the central bank kept the Taiwan dollar from appreciating, but that distorted its value. This helped exporters retain a competitive edge, but it also hurt the vast majority of local consumers and dampened the development of domestic demand industry.

Crucially, keeping the value of the Taiwan dollar low hampers the upgrading of industry.

Ultimately, using depreciation to maintain a competitive edge encourages domestic enterprises to stand still because they lack any incentives to adjust their fundamentals and actively upgrade.

Worse still, the long-term interference of the central bank, means that many enterprises have developed a deep-rooted expectation that the central bank will step in to curb the appreciation of the Taiwan dollar, as a result of which many firms are unaware of currency rate risk hedging strategies.

Viewed from a long term perspective, we believe that allowing the exchange rate to return to its market level and minimizing market interference is the best approach. Such a strategy encourages manufacturers to deal with currency fluctuation risk, enhances their awareness of hedging measures and forces them to move in the direction of upgrading and developing high value-added products. (Editorial abstract – May 13, 2017) (Summarized by Lilian Wu)